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GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 5
th
Semester
INSURANCE SERVICE MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What do you mean by life insurance? Explain the documents required for purchasing
life insurance.
2. Explain the organization structure of life insurance management.
SECTION-B
3. Explain in detail agency commission structures.
4. What are the prerequisites to become an agent? Explain in detail training procedures
for becoming an agent.
SECTION-C
5. What is the procedure for calculating the amount of premium and bonuses?
6. What is the role of surveyors ? Discuss the concept of surplus and its distribution.
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SECTION-D
7. What are the factors impacting the demand for insurance?
8. Write a short note on:
(a) Cost Consciousness and pricing of insurance product.
(b) Accounting Practices and Pricing of insurance product.
GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 5
th
Semester
INSURANCE SERVICE MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What do you mean by life insurance? Explain the documents required for purchasing
life insurance.
Ans: A Different Start: The Village Fair Story
Imagine a small village fair. Children are running around with balloons, shopkeepers are
selling sweets, and elders are sitting together sharing wisdom. In one corner, Ramesh, a
young farmer, is talking to an insurance agent.
“Sir, why do I even need this life insurance? I’m young and healthy. Why should I spend
money on this?” Ramesh asks curiously.
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The agent smiles and replies, “Ramesh, life is uncertain. Just like you put fertilizers in your
field today to secure tomorrow’s harvest, life insurance is something you buy today to
secure your family’s future.”
This conversation may look simple, but it actually hides the real meaning of life insurance.
Now let’s unpack it slowly, in a way that anyone—even someone who has never heard of
life insurance—can easily understand.
What Do You Mean by Life Insurance?
Life insurance is like a promise—a financial promise between you and an insurance
company.
• You (the policyholder) agree to pay small amounts of money regularly. These
payments are called premiums.
• In return, the insurance company promises to pay a big amount (called sum assured)
to your family or nominee if something unfortunate happens to you.
Think of it like this:
You pay a little now, so your loved ones don’t have to struggle later.
For example: If Ramesh takes a life insurance policy of ₹10 lakhs and pays a premium of
₹5,000 every year, then if he passes away suddenly, his family will receive ₹10 lakhs from
the company. This money will help them pay for food, education, or other needs.
So, in short:
Life insurance is a protective shield that ensures your family remains financially safe even
when you are not around.
Breaking It Down Further
Life insurance is not just about money. It gives:
1. Security – Your family will not face financial crisis.
2. Peace of Mind – You can live without constant worry about "what if something
happens to me?"
3. Future Planning – Some policies also act like savings or investments, helping you
build wealth.
So, life insurance is both protection and sometimes even investment.
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Documents Required for Purchasing Life Insurance
Now, just like you need certain papers to buy land, or to take admission in a college, you
also need to submit documents for buying life insurance. Insurance companies ask for
documents to:
• Confirm your identity,
• Check your age and income,
• Ensure you are genuine and eligible for the policy.
Let’s go step by step, almost like a checklist:
1. Identity Proof (Who Are You?)
The company must know exactly who you are. Documents accepted are:
• Aadhaar Card
• Passport
• Voter ID
• PAN Card
• Driving License
Without this, how will they even know the policy belongs to you?
2. Address Proof (Where Do You Live?)
This helps the company contact you and also avoids fraud. Examples:
• Electricity Bill
• Telephone Bill
• Ration Card
• Aadhaar Card
• Passport
3. Age Proof (How Old Are You?)
Since premiums depend on your age, this document is very important. Younger people pay
less, while older people pay more. Documents include:
• Birth Certificate
• School Leaving Certificate
• Passport
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• Aadhaar Card
4. Income Proof (How Much Do You Earn?)
Insurance companies don’t allow people to buy policies beyond their earning capacity. For
example, if someone earns ₹2 lakhs a year, they cannot take a ₹5 crore policy. Income proof
ensures balance. Documents include:
• Salary Slip
• Income Tax Returns (ITR)
• Bank Statement
• Form 16 (for salaried individuals)
5. Medical Report (Are You Healthy?)
Health matters in insurance. A person with serious illness might pay higher premiums.
Sometimes, medical check-ups are required. The reports confirm your fitness.
6. Photographs
A recent passport-size photo is required for the company’s records.
7. Nominee Details
The nominee is the person who will receive the money after you. Usually, it’s a spouse,
child, or parent. Along with nominee details, sometimes their ID proof is also asked.
Putting It All Together – The Basket Example
Think of life insurance like preparing a basket of protection for your family.
• Your premium is the fruit you keep adding to the basket regularly.
• The documents are like labels on that basket—so everyone knows whose basket it is,
where it came from, and who will receive it.
Without documents, the company cannot be sure about your identity, age, income, or
nominee. So, just like shops ask for bills to prove ownership, insurance companies ask for
documents to protect both you and themselves.
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Real-Life Connection
In real life, you might have heard stories of families struggling after losing their earning
member. But families where the person had life insurance—those families had financial
support to continue education, pay debts, or run their daily life.
So, life insurance is not just a financial product; it’s a gesture of responsibility and love. By
buying it, you are silently telling your family:
“Even if I am not around, I’ve got you covered.”
Conclusion
To conclude, life insurance is a safety net that protects your family in times of uncertainty. It
is not just about money, but about security, dignity, and peace of mind.
And while purchasing it, certain documents are required—like identity proof, address proof,
age proof, income proof, medical reports, photographs, and nominee details—because they
make the entire process transparent and fair.
So, next time someone asks, “What is life insurance and why do I need documents for it?”,
you can confidently say:
Life insurance is a promise of care for tomorrow, and documents are the keys that
make this promise valid today.
2. Explain the organization structure of life insurance management.
Ans: Why an Organization Structure Matters in Life Insurance
Life insurance is not just about selling policies — it’s about managing risk, money, and trust
over decades. A policy sold today might need to pay out 20 or 30 years later. That means:
• The company must stay financially strong.
• It must keep accurate records for decades.
• It must serve customers promptly and fairly.
• It must comply with strict regulations.
To achieve all this, the company needs a clear hierarchy and specialised departments —
each with defined responsibilities but all working towards the same goal.
The Broad Levels of Life Insurance Management
Think of the structure as three main layers:
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1. Top Management — The city’s mayor and council: vision, policy, and strategy.
2. Middle Management — The department heads: translating strategy into action.
3. Operational Level — The field workers and service staff: executing tasks and serving
customers.
1. Top Management — The Strategic Brain
This is where the big decisions are made.
Board of Directors
• Sets the overall mission and vision.
• Approves major policies, budgets, and investments.
• Ensures compliance with laws and regulations.
Chairperson / Managing Director / CEO
• The chief executive of the company.
• Leads the organisation, represents it to regulators (like IRDAI in India), investors, and
the public.
• Makes key strategic decisions — new products, expansion plans, technology
adoption.
Executive Committee
• Senior leaders from different functions (finance, marketing, operations, HR,
actuarial).
• Meet regularly to coordinate and review performance.
In our city analogy: This is the mayor’s office — setting the direction, ensuring the city
grows sustainably, and keeping it safe and prosperous.
2. Middle Management — The Organising Hands
These are the department heads who take the top management’s vision and turn it into
workable plans.
a) Marketing and Sales Department
• Designs marketing campaigns.
• Manages the sales force and distribution channels (agents, bancassurance, online
sales).
• Conducts market research to understand customer needs.
b) Underwriting Department
• Evaluates insurance applications.
• Assesses risk based on health, age, occupation, lifestyle.
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• Decides whether to accept the proposal and at what premium.
c) Actuarial Department
• The “mathematicians of risk.”
• Calculate premiums, reserves, and future liabilities.
• Ensure the company can meet its long-term obligations.
d) Finance and Accounts Department
• Manages investments of premium income.
• Prepares financial statements.
• Ensures compliance with accounting standards and regulatory capital requirements.
e) Claims Department
• Processes death claims, maturity claims, and surrenders.
• Verifies documents and ensures timely settlement.
f) Customer Service Department
• Handles policy servicing — address changes, nominations, premium reminders.
• Resolves customer queries and complaints.
g) Human Resources Department
• Recruits, trains, and manages staff.
• Designs incentive schemes for agents and employees.
h) IT Department
• Maintains policy administration systems.
• Develops online portals and mobile apps.
• Ensures data security.
In our city analogy: These are the heads of departments — public works, finance, health,
safety — each ensuring their area runs smoothly.
3. Operational Level — The Execution Engine
This is where the real action happens — the people who interact directly with customers
and carry out day-to-day tasks.
Branch Offices
• Spread across cities and towns.
• Handle local sales, policy servicing, and claims assistance.
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Sales Force
• Agents: The backbone of life insurance distribution in India.
• Bancassurance Officers: Sell policies through bank branches.
• Direct Sales Teams: Handle corporate clients or high-net-worth individuals.
Customer Support Staff
• Answer calls, respond to emails, assist walk-in customers.
Back-Office Staff
• Process applications, update records, handle documentation.
In our city analogy: These are the municipal workers, police officers, teachers — the people
who make the city’s services real and tangible for its citizens.
Specialised Units in Life Insurance Management
Some life insurance companies also have specialised units to handle unique functions:
• Product Development Cell: Designs new insurance products and riders.
• Legal Department: Handles contracts, disputes, and compliance issues.
• Internal Audit: Checks that all departments follow rules and procedures.
• Reinsurance Department: Arranges for sharing risk with other insurers.
Flow of Work in Life Insurance Management
To see how this structure works together, let’s follow a policy’s journey:
1. Marketing & Sales attract a customer.
2. Underwriting assesses the application.
3. Actuarial ensures the premium is correct.
4. Finance records the premium and invests it.
5. Customer Service maintains the policy over the years.
6. Claims settles the benefit when due.
7. IT supports every step with secure systems.
8. Top Management monitors performance and adjusts strategy.
Every department plays its part — like different city departments working together to build
a road, maintain it, and ensure it serves the public.
Why This Structure Works
• Clear Accountability: Everyone knows their role.
• Specialisation: Experts handle specific tasks — actuaries for risk, underwriters for
assessment, marketers for sales.
• Coordination: Departments work together under a unified strategy.
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• Scalability: The structure can expand as the company grows.
A Simple Story to Remember
Think of LIC or any big life insurer as a city:
• The Mayor (CEO) sets the vision: “We will protect every family in the country.”
• The City Council (Board) ensures laws are followed and resources are used wisely.
• The Department Heads (Middle Management) plan roads (sales channels), utilities
(IT systems), safety (claims), and finance (investments).
• The City Workers (Operational Staff) meet citizens daily, solve their problems, and
deliver services.
When all parts work in harmony, the city thrives — and so does the life insurance company,
fulfilling its promise to policyholders.
Conclusion
The organisation structure of life insurance management is a carefully designed system that
balances strategy, specialisation, and service. From the top executives who chart the
course, to the middle managers who plan the route, to the operational teams who walk the
path every day — each plays a vital role.
It’s this structure that allows a life insurance company to keep its promises for decades,
turning today’s premiums into tomorrow’s protection.
SECTION-B
3. Explain in detail agency commission structures.
Ans: A Fresh Start: The Tea Shop Story
Imagine you open a small tea shop in your neighborhood. You make the best masala chai in
town, but here’s the problem: very few people know about your shop. You think, “If only
more people tasted my tea, they’d become my regular customers!”
So, you decide to ask your friend Rohan to help. Rohan is good at talking to people, so you
tell him:
“Rohan, every time you bring me a new customer, I’ll give you a part of my earnings as a
reward.”
That reward you promised is nothing but agency commission. Rohan becomes your agent,
and the money you give him for bringing customers is called his commission.
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This tiny story is exactly how businesses and agents work in the real world. Companies can’t
directly reach every customer, so they appoint agents, who sell products or services on their
behalf. In return, agents earn commission.
Now let’s dive deeper into agency commission structures, the “blueprint” that decides how
agents are paid, how much they get, and under what conditions.
What is Agency Commission?
Agency commission is the payment given by a principal (the company or business owner) to
an agent (the person or firm representing them) for successfully performing tasks—usually
selling goods or services.
It’s not a fixed salary. Instead, it depends on performance, targets, and type of agreement.
Commission motivates agents to work harder, because the more they sell, the more they
earn.
Why is Commission Important?
1. For Companies (Principals):
o Saves cost of hiring full-time staff everywhere.
o Ensures payment is linked to actual sales.
o Expands market reach through local agents.
2. For Agents:
o Opportunity to earn more than a fixed salary.
o Flexibility of work.
o Recognition as a representative of a big brand.
So, commission structures are not just numbers—they are like the rules of the game that
keep both sides happy and motivated.
Types of Agency Commission Structures
There’s no “one-size-fits-all.” Depending on the industry and agreement, commissions are
structured differently. Let’s explore the main types one by one, with examples so they’re
crystal clear.
1. Straight Commission (Pure Commission Model)
• Here, the agent earns money only on sales made. No sale = No income.
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• Example: If the agreed commission is 10% and the agent sells goods worth
₹1,00,000, his commission = ₹10,000.
• Advantage: Motivates the agent to push sales.
• Disadvantage: If sales are low, the agent earns nothing.
This is like your friend Rohan earning only when he brings someone to your tea shop.
2. Salary plus Commission
• The agent gets a fixed salary plus commission on sales.
• Example: An insurance agent might get ₹20,000 per month as salary + 5%
commission on policies sold.
• Advantage: Provides stability (salary) and motivation (commission).
• Disadvantage: Costlier for the company compared to straight commission.
This is like giving Rohan a monthly pocket money, plus extra chai coupons every time he
brings a customer.
3. Overriding Commission
• Given to senior agents or managers for supervising sub-agents.
• Example: If a regional manager controls 10 sales agents, he may get 2% on all sales
made by his team, in addition to his own earnings.
• It rewards guidance and leadership.
So if Rohan hires his cousin to bring tea drinkers, you still give Rohan a small extra cut for
managing his cousin.
4. Del Credere Commission
• Special commission paid when the agent takes responsibility of recovering money
from customers.
• Example: If a buyer fails to pay, the agent bears the loss, not the company.
• To cover this risk, the agent gets extra commission (usually 1–2% more).
This is like telling Rohan: “If your friend drinks tea on credit, you make sure he pays. If not,
you cover it. For this, I’ll give you extra money.”
5. Progressive Commission
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• Commission rate increases with higher sales.
• Example: 5% up to ₹50,000 sales, 7% for ₹50,000–₹1,00,000, and 10% beyond
₹1,00,000.
• Advantage: Pushes agents to cross targets.
It’s like telling Rohan: “Bring 10 customers, I’ll give you ₹10 each. But if you bring 20, I’ll give
you ₹15 each!”
6. Fixed Commission (Flat Rate)
• Same percentage is applied to all sales, regardless of amount.
• Simple and fair, but not very motivating for higher performance.
Like paying Rohan ₹5 for every single customer, whether he brings one or one hundred.
7. Exclusive or Territory-Based Commission
• An agent gets exclusive rights for a particular region.
• Example: One distributor is given commission for all sales in Delhi, another for
Mumbai.
• Prevents clashes between agents in the same area.
Like telling Rohan: “You’ll handle customers only from our colony. No one else can claim
your area.”
8. Combination Commission
• Many companies mix different models: salary + commission + bonuses.
• Example: A car dealer may get a base salary, commission on each car, plus a bonus if
monthly sales cross a target.
This is like giving Rohan pocket money, plus per-customer reward, plus a party treat if he
brings 50 customers in a month!
Factors Affecting Commission Structures
1. Industry Norms: Insurance agents usually earn higher commissions (up to 25–35%)
compared to FMCG distributors (2–5%).
2. Risk Involved: Del credere agents earn more due to higher responsibility.
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3. Sales Volume: Low-value, high-volume items (like tea packets) have lower
commission, while high-value items (like real estate) have very high commissions.
4. Relationship & Trust: Long-term, loyal agents may negotiate better structures.
5. Territory Size & Competition: More competition often means higher commissions to
motivate agents.
Pros and Cons of Commission System
Advantages for Companies:
• Pay depends on performance.
• Motivates agents to increase sales.
• Reduces fixed cost burden.
Advantages for Agents:
• High earning potential.
• Encourages entrepreneurship spirit.
• Flexible work style.
Disadvantages for Companies:
• High commission might reduce profits.
• Too much dependence on agents may cause control issues.
Disadvantages for Agents:
• Uncertainty of income in low-sales seasons.
• Pressure and stress of targets.
• Sometimes unfair if rules are unclear.
Real-Life Examples
• Insurance Sector: Agents get first-year high commission (20–25%), then lower in
later years.
• Retail/Distribution: FMCG distributors may earn 2–10% depending on the product.
• Real Estate: Brokers earn 1–2% of property value—huge sums on big deals.
• Stock Brokerage: Agents earn commission on every trade their client makes.
Conclusion: The Win-Win Deal
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Agency commission structures are not just about percentages and money—they are about
creating a win-win deal between a company and its representatives. The company expands
its reach, and the agent earns for his effort.
Think back to your tea shop. Without Rohan, maybe you’d still have only a few customers.
With him, your tea becomes the talk of the town. But Rohan wouldn’t have worked so hard
if you hadn’t given him a fair commission.
That’s the beauty of agency commission: when designed well, it fuels growth for the
company and success for the agent.
4. What are the prerequisites to become an agent? Explain in detail training procedures
for becoming an agent.
Ans: Prerequisites to Become an Insurance Agent
In India, the Insurance Regulatory and Development Authority of India (IRDAI) sets the rules
for who can become an insurance agent. These prerequisites ensure that agents are
capable, trustworthy, and ready to handle the responsibility of guiding people’s financial
decisions.
1. Age Requirement
• You must be at least 18 years old.
• This ensures you are legally an adult and can enter into binding contracts.
2. Educational Qualification
• Minimum qualification: Passed 10th standard (for rural areas) or 12th standard (for
urban areas).
• This ensures you have the basic literacy and numeracy skills to understand policies
and explain them to clients.
3. Clean Background
• You should not have been convicted of any offence involving fraud, dishonesty, or
moral turpitude.
• This is important because agents handle sensitive financial matters and must be
trusted by both clients and the insurer.
4. Association with an Insurance Company
• You must be sponsored by a licensed insurance company or apply directly to IRDAI as
an individual.
• This sponsorship is like your “entry ticket” into the profession.
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5. Completion of Mandatory Training
• Before you can take the licensing exam, you must complete pre-licensing training
from an IRDAI-approved institution.
• The duration is usually 15 hours for general insurance and 25 hours for life insurance
(sometimes combined if you want to sell both).
6. Passing the IRDAI Exam
• After training, you must pass the IRDAI IC-38 examination.
• This tests your knowledge of insurance products, regulations, ethics, and customer
service.
Training Procedures for Becoming an Agent
Now that you know the prerequisites, let’s walk through the training journey step by step
— as if you’re enrolling in a professional course that transforms you from a beginner into a
certified advisor.
Step 1: Choosing Your Path
• Decide whether you want to become a life insurance agent, a general insurance
agent, or both.
• Life insurance focuses on policies like term plans, endowment plans, and ULIPs.
• General insurance covers health, motor, travel, property, and more.
Step 2: Enrolment with an Approved Training Provider
• You can enrol through:
o The insurance company sponsoring you.
o An IRDAI-approved training institute.
• You’ll need to submit:
o Proof of age and education.
o Identity documents (Aadhaar, PAN).
o Passport-size photographs.
Step 3: Pre-Licensing Training
This is where you learn the ropes. The training is structured to give you both knowledge and
practical skills.
Duration:
• Life Insurance: 25 hours.
• General Insurance: 15 hours.
• Composite (both): 50 hours.
Mode:
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• Classroom sessions or online modules (many insurers now offer e-learning).
Content Covered:
1. Basics of Insurance:
o Principles of insurance (utmost good faith, insurable interest, indemnity,
etc.).
o Types of insurance products.
2. Regulatory Framework:
o IRDAI regulations.
o Code of conduct for agents.
3. Product Knowledge:
o Features, benefits, exclusions of various policies.
4. Sales Skills:
o Prospecting, presentation, objection handling, closing sales.
5. Customer Service:
o Policy servicing, claims assistance, grievance redressal.
6. Ethics and Professionalism:
o Building trust, avoiding mis-selling, acting in the client’s best interest.
7. Practical Exercises:
o Role-plays, case studies, mock presentations.
Step 4: The IRDAI IC-38 Examination
After training, you must appear for the IC-38 exam conducted by the Insurance Institute of
India or other authorised bodies.
Exam Format:
• Multiple-choice questions.
• Covers all topics from training.
• Passing marks: Usually 35 out of 50.
Tip: The training prepares you well — pay attention to real-life examples given by trainers,
as they often form the basis of exam questions.
Step 5: Licensing
• Once you pass the exam, IRDAI issues you an Agent’s Licence.
• This licence is valid for 3 years (renewable with further training).
• You can now legally solicit and sell insurance policies for the company that
sponsored you.
Step 6: Post-Licensing Support and Development
• Most insurers provide ongoing training to keep you updated on new products,
regulations, and sales techniques.
• You may also be mentored by senior agents or managers.
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Why the Training Matters
Becoming an insurance agent isn’t just about selling — it’s about advising. When a family
trusts you to secure their future, you must:
• Understand their needs.
• Recommend suitable products.
• Explain terms clearly.
• Be there when they need to make a claim.
The training ensures you:
• Know the law.
• Understand products deeply.
• Can communicate effectively.
• Uphold ethical standards.
A Simple Story to Remember
Think of Riya, a 22-year-old graduate who wants a career with flexibility and purpose.
• She approaches a life insurance company, meets the eligibility criteria, and enrols in
the 25-hour pre-licensing training.
• Over a week, she learns about life insurance products, how to talk to clients, and the
importance of honesty in selling.
• She passes the IC-38 exam on her first attempt.
• With her licence in hand, she starts meeting clients, helping them choose policies
that fit their needs.
• Over time, she builds a reputation as a trustworthy advisor — all because she started
with the right training and mindset.
Conclusion
The prerequisites to become an insurance agent are like the foundation of a building — age,
education, clean record, sponsorship, training, and passing the exam. The training
procedure is the construction phase — where you gain the knowledge, skills, and confidence
to serve clients well.
By the time you’re licensed, you’re not just someone selling policies — you’re a professional
guide helping people protect their dreams and secure their future.
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SECTION-C
5. What is the procedure for calculating the amount of premium and bonuses?
Ans: Part 1: Calculating the Premium — The Recipe for Your Policy Price
When you buy a life insurance policy, the premium isn’t just a random figure. It’s carefully
calculated so that:
• The insurer can pay the promised benefits when due.
• The company covers its expenses.
• There’s a margin for profit and safety.
Think of it like pricing a train ticket — the fare must cover the cost of running the train,
paying staff, maintaining tracks, and still leave something for future improvements.
Step 1: Assessing the Risk (Mortality Rates)
The first ingredient is mortality data — statistical tables showing the probability of death at
each age.
• If you’re 25, the probability of death in the next year is very low; if you’re 60, it’s
higher.
• These probabilities come from mortality tables prepared from large population
studies.
Example: If the probability of death for a 30-year-old is 0.001 (1 in 1,000), and the sum
assured is ₹10,00,000, the pure risk cost for that year is ₹1,000.
Step 2: Adding the Time Value of Money (Interest Rates)
Premiums are paid in advance, but claims may be paid years later. The insurer invests your
premiums and earns interest.
• Higher expected returns mean lower premiums (because investment income helps
fund claims).
• Lower returns mean higher premiums.
Step 3: Considering the Term of the Policy
The longer the term, the more years the insurer must cover the risk — but also the more
years they can invest your money.
Step 4: Adding Expenses
Running an insurance company costs money:
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• Agent commissions
• Office expenses
• Medical examinations
• Policy servicing
These are added to the pure risk cost.
Step 5: Adding a Margin for Contingencies and Profit
No one can predict the future perfectly — so insurers add a small margin to cover
unexpected events and ensure financial stability.
Step 6: Choosing the Premium Payment Mode
Premiums can be:
• Single premium — paid once at the start.
• Regular premium — paid annually, half-yearly, quarterly, or monthly.
The mode affects the total because of collection costs and the timing of cash flows.
In Formula Form (Simplified):
Premium = (Present value of expected benefits + Present value of expenses + Margin)
÷ Present value of premiums payable
A Simple Story Example: Ravi, aged 35, wants a 20-year term policy with a sum assured of
₹20 lakh.
1. Actuary checks mortality table: probability of death each year × ₹20 lakh = yearly risk
cost.
2. Discounts future costs using expected interest rate.
3. Adds expenses and margin.
4. Divides by the number of premium payments.
The result is the annual premium Ravi must pay.
Part 2: Calculating Bonuses — Sharing the Surplus
In participating policies (like endowment or whole life), the insurer shares part of its profits
with policyholders in the form of bonuses. Non-participating policies don’t get bonuses —
their premiums are lower.
Step 1: Determining the Surplus
At the end of each financial year, the insurer’s actuaries prepare a valuation balance sheet:
• Assets: Investments, cash, receivables.
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• Liabilities: Present value of future claims, reserves, expenses.
If assets exceed liabilities (after keeping a safety margin), the excess is the surplus.
Step 2: Allocating the Surplus
Regulations (like IRDAI norms in India) often require that a large portion — e.g., 90% — of
the surplus from participating business be distributed to policyholders as bonuses.
Step 3: Types of Bonuses
1. Simple Reversionary Bonus (SRB)
o Declared as a fixed amount per ₹1,000 sum assured.
o Added to the sum assured and paid at maturity or death.
o Example: ₹40 per ₹1,000 SA on a ₹5 lakh policy = ₹20,000 bonus for that
year.
2. Compound Reversionary Bonus (CRB)
o Declared on the sum assured plus previously added bonuses.
o Grows faster over time.
3. Interim Bonus
o Paid if a policy matures or a claim arises between two bonus declaration
dates.
4. Cash Bonus
o Paid out immediately instead of being added to the sum assured.
Step 4: Bonus Calculation Example
Let’s say Meera has a ₹10 lakh participating endowment policy for 20 years.
• The insurer declares a simple reversionary bonus of ₹50 per ₹1,000 SA each year.
• Annual bonus = ₹50 × (₹10,00,000 ÷ ₹1,000) = ₹50 × 1,000 = ₹50,000.
• Over 20 years, if the rate stays the same, total bonuses = ₹10,00,000.
At maturity, she gets:
• Sum assured: ₹10,00,000
• Total bonuses: ₹10,00,000
• Total payout: ₹20,00,000
Step 5: Factors Affecting Bonus Rates
• Investment performance of the insurer.
• Claim experience (fewer claims = higher surplus).
• Expense control.
• Economic conditions (interest rates, inflation).
Why This Matters to Policyholders
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• Premium calculation ensures fairness — you pay in proportion to the risk you bring
and the benefits you expect.
• Bonus calculation rewards you for being part of the insurer’s success.
• Understanding both helps you choose the right policy and set realistic expectations.
A Story to Tie It Together
Think of the insurer as a cooperative farm:
• Premiums are like seeds you and other members contribute each season.
• The farm uses these seeds (money) to grow crops (investments) and protect against
pests (claims).
• At the end of the season, after setting aside enough seeds for next year (reserves),
the extra harvest is shared among members as bonuses.
The better the farm is managed — good weather (economy), fewer pests (claims), efficient
farming (low expenses) — the bigger your share of the harvest.
Conclusion
The procedure for calculating premiums is a careful balancing act of risk assessment,
investment returns, expenses, and safety margins. The procedure for calculating bonuses is
about measuring the surplus after meeting all obligations and sharing it fairly among
participating policyholders.
Both are rooted in mathematics, but their purpose is deeply human — to keep promises
made today, decades into the future, and to reward loyalty along the way.
6. What is the role of surveyors ? Discuss the concept of surplus and its distribution.
Ans: The Role of Surveyors and the Concept of Surplus with Its Distribution
Imagine you are part of a community that has just bought a huge piece of land. Everyone is
excited—some want to build houses, some want to farm, and others want to open small
shops. But before anyone can begin, a big question arises: Who will decide how much land
belongs to whom, how the plots will be divided, and whether everything is being used fairly?
This is where a special person steps in—the surveyor. You can think of the surveyor as a
trusted guide with measuring tools in hand, someone who ensures that every inch of land is
properly measured, recorded, and distributed. Without the surveyor, disputes would arise,
land might overlap, or someone might end up with more than their fair share.
Just like in our story about land, surveyors play a vital role in the real world too. And when
we connect this idea to economics and insurance, surveyors are equally important. Let’s
unfold this story step by step.
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Part 1: The Role of Surveyors
Surveyors are professionals whose job is to measure, assess, and give accurate reports
about things of value. Their role varies depending on the field—land, construction,
insurance, shipping, or even government projects. Let’s see how they work in practice:
1. In Land and Property:
Surveyors measure land, mark boundaries, and prepare maps. They ensure no two
owners fight over borders and that land records are legally correct. Imagine building
a house only to find later that half of it stands on your neighbour’s property—that’s
exactly the problem surveyors prevent.
2. In Construction:
Before skyscrapers or highways are built, surveyors analyze the site. They check
whether the ground is suitable, how the structures will fit, and whether safety
standards are followed. Without them, buildings could be unsafe or misaligned.
3. In Insurance:
Here surveyors have a very special job. Whenever an accident, fire, theft, or damage
occurs, surveyors assess the loss. Suppose a factory catches fire. The owner claims
insurance worth ₹50 lakh. The insurance company, before paying, sends a surveyor
to inspect: Was the fire genuine? How much loss actually happened? Was it
accidental or deliberate? Based on the surveyor’s honest report, the claim is settled
fairly.
4. In Shipping and Transport:
When cargo is sent across seas or goods are transported in bulk, surveyors check the
condition, weight, and packaging. If damage occurs during transit, they calculate the
loss and report it for compensation.
So, in every sector, the surveyor acts like a bridge of trust—between landowners, between
insurers and insured, between government and citizens. Their role ensures fairness,
accuracy, and justice in financial and physical matters.
Part 2: Understanding the Concept of Surplus
Now let’s shift our story from surveyors to another important concept: surplus.
Think of a village fair. Every year, the villagers contribute money to organize the event. Food
stalls, games, and decorations are set up. After paying all expenses—like electricity,
workers, and prizes—there is still some money left in the box. This extra money is called the
surplus.
In economics and insurance, the meaning is very similar. A surplus is the amount left after
all costs, expenses, and claims are settled. For example:
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• In insurance companies, policyholders pay premiums regularly. From this pool of
money, claims are paid when accidents or losses occur. After paying claims, covering
expenses, and keeping reserves, if money still remains, that is the surplus.
• In cooperative societies or mutual organizations, members contribute for common
benefits. Whatever remains after paying expenses becomes the surplus.
• Even in government finance, if revenue collections exceed expenditures, the extra
amount is called a surplus.
In simple words:
Surplus = Total Income – Total Expenses
It is like the leftover piece of cake after everyone has eaten. The existence of surplus is a
sign of good management and efficiency.
Part 3: Distribution of Surplus
Now the story becomes interesting. The real challenge is: What do we do with the surplus?
Who should get it, and how much?
Let’s return to our fair example. After the event, suppose ₹20,000 is left as surplus. The
villagers may decide to:
1. Share it equally among all contributors.
2. Use it for next year’s fair.
3. Spend it on repairing the community hall.
4. Keep it as a safety fund for emergencies.
In reality, organizations and insurance companies follow similar methods of surplus
distribution. The principles are:
1. Reinvestment into the Organization:
A part of the surplus is kept aside to strengthen future operations. For insurance
companies, this may mean building stronger reserves to handle big claims in the
future.
2. Distribution to Members/Policyholders:
In cooperative societies or mutual insurance companies, the surplus is often shared
among members. It may be distributed as bonuses, reduced premiums, or extra
benefits. This builds trust and loyalty.
3. Charitable or Social Use:
Sometimes, a portion is allocated to community welfare, education, health services,
or development projects.
4. Reserve Funds:
Surplus can also be stored in reserve funds for contingencies like disasters, sudden
losses, or market fluctuations.
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5. Legal and Regulatory Guidelines:
The way surplus is distributed is often guided by law. Companies cannot distribute
surplus recklessly; they must follow rules to ensure fairness and stability.
Part 4: Linking Surveyors with Surplus
At first glance, surveyors and surplus may seem like separate ideas, but they are beautifully
connected. Here’s how:
• Surveyors in insurance assess claims accurately. If they report honestly, only
genuine claims are paid. This prevents wastage and ensures that surplus is preserved
for deserving policyholders.
• In cooperative societies, surveyors may check land, assets, or resources before
profits are calculated. This ensures correct valuation, which ultimately affects the
amount of surplus.
• Their fair assessment helps in fair distribution of surplus. For instance, if an
insurance surveyor finds that the actual damage is ₹5 lakh, not ₹10 lakh as claimed,
the company saves ₹5 lakh. That saved amount increases the surplus, which can
later be shared fairly among all members.
So, surveyors are like the watchdogs of surplus, protecting it from misuse and ensuring
justice.
Part 5: Why This Matters to Students and Society
You might ask, Why should we care so much about surveyors and surplus?
The answer is simple:
• Without surveyors, disputes, fraud, and unfair claims would destroy trust in systems.
• Without surplus, organizations would have no cushion for growth or emergencies.
• And without fair distribution of surplus, members would lose faith, leading to
collapse of cooperative or insurance models.
Thus, both concepts ensure fairness, stability, and sustainability in society’s financial and
social systems.
Conclusion
If we imagine society as a large cooperative family, then surveyors are like the guardians
who keep fairness alive, while surplus is like the extra wealth that ensures everyone
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benefits from good management. Together, they create a balance where resources are not
wasted, disputes are minimized, and benefits are shared in a just manner.
So, the role of surveyors and the concept of surplus distribution may look technical on
paper, but in reality, they are about building trust, justice, and fairness—values that keep
our economy and society strong.
SECTION-D
7. What are the factors impacting the demand for insurance?
Ans: Factors Impacting the Demand for Insurance
Imagine you are walking through a busy marketplace. Some shops sell clothes, some sell
food, others sell gadgets. But in one corner, there is a special shop—it doesn’t sell things
you can touch; instead, it sells security, peace of mind, and protection. This shop is called
Insurance.
Now, here’s the fun part: unlike apples or shoes, insurance is not something people want
just because they like it. People buy insurance because of certain situations, fears, needs, or
laws. In other words, many factors affect the demand for insurance. Let’s step into this
shop together and explore these factors like a journey.
1. Level of Income – The Wallet Factor
Think about it: if someone earns just enough to buy food and pay rent, would they spend
extra on insurance? Probably not. But if a person has a good salary, savings, or profits in
business, they can afford to think about protecting their family and assets.
• Low income → little or no insurance demand.
• Middle income → moderate insurance demand, mostly for essentials like health or
vehicle insurance.
• High income → higher demand, including life, property, travel, and investment-
linked insurance.
So, the size of the wallet directly decides how much protection someone is willing to buy.
2. Awareness and Education – The Knowledge Factor
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Imagine two friends: Ramesh and Suresh. Ramesh reads newspapers, attends seminars, and
knows that accidents or illnesses can drain his savings. He buys health and life insurance.
Suresh, on the other hand, thinks nothing bad will ever happen to him and avoids insurance.
This shows us that knowledge is power in the world of insurance. If people are aware of
risks and the benefits of insurance, the demand increases. That’s why insurance companies
spend so much money on advertisements, workshops, and campaigns.
3. Price of Insurance Premium – The Cost Factor
Would you buy mangoes if the price was ₹200 per kg? Probably not. Similarly, people
hesitate to buy insurance if premiums are too high.
• Low premiums (affordable) → more people are interested.
• High premiums (expensive) → only the rich or those forced by law will buy.
So, just like the cost of groceries affects shopping, the premium cost affects insurance
demand.
4. Legal Requirements – The Rule Factor
Sometimes people don’t buy insurance because they want to—they buy it because they
have to. For example:
• Vehicle insurance is mandatory by law in most countries.
• Employers may be required to provide employee insurance.
• Certain businesses must insure against fire or liability risks.
This legal push ensures that demand exists even if people are reluctant.
5. Age and Family Size – The Life Stage Factor
A 20-year-old student might feel, “Why do I need life insurance? I’m young and healthy.”
But a 40-year-old father of two children thinks, “What if something happens to me? Who
will take care of my family?”
• Young and single → less demand for insurance.
• Married with dependents → higher demand for life and health insurance.
• Old age → higher demand for health insurance but less for life insurance (because
premiums become too costly).
So, the stage of life and family responsibilities directly shape insurance demand.
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6. Risk Perception – The Fear Factor
Let’s imagine two cities:
• In City A, earthquakes happen often.
• In City B, life is calm and safe.
Which city’s people will buy more property insurance? Obviously, City A.
People who feel greater risk or uncertainty (like frequent accidents, diseases, or natural
disasters) will demand more insurance. Fear of loss becomes a motivator.
7. Social and Cultural Factors – The Tradition Factor
In some cultures, people believe strongly in “saving for the future” and protecting the
family. Insurance demand is naturally higher there. In other places, people depend more on
relatives or community support, so they don’t think insurance is necessary.
For example:
• In developed countries, individuals rely heavily on insurance.
• In developing countries, joint family systems often reduce the urgency of buying
insurance.
So, society and culture silently guide whether people demand insurance or not.
8. Economic Environment – The Stability Factor
When the economy is growing, jobs are stable, and businesses are booming, people feel
secure enough to invest in insurance. But during recessions or job losses, insurance is the
first thing people cut from their budgets.
• Good economy → more insurance sales.
• Poor economy → insurance demand falls.
Insurance demand, therefore, rides the waves of the economy.
9. Availability of Insurance Products – The Choice Factor
If you go to a shop and find only one type of boring shirt, will you be excited? No. But if you
see stylish shirts in different colors and prices, you’ll buy more.
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Similarly, when insurance companies offer a wide range of products—like health, life, fire,
travel, education plans, retirement plans—the demand increases because people can
choose according to their needs.
10. Trust in Insurance Companies – The Confidence Factor
Insurance is a promise on paper. You pay today, but you only get help when something goes
wrong. So, people must trust the company.
If companies delay payments or cheat customers, demand falls. But if they are honest, quick
in settlement, and transparent, demand rises. Trust acts like invisible glue in the insurance
industry.
11. Government Policies and Tax Benefits – The Incentive Factor
In many countries, governments encourage people to buy insurance by giving tax
deductions or subsidies. For example, premiums paid for life or health insurance might
reduce your taxable income.
This incentive makes people feel they are not only protecting their future but also saving
money today.
12. Technological and Marketing Influence – The Accessibility Factor
Today, you can buy insurance sitting at home with just a smartphone. Chatbots, websites,
apps, and online comparisons make it easy to understand policies. Also, catchy
advertisements and celebrity endorsements influence people.
The easier and more attractive the process, the more the demand grows.
Wrapping it up – The Story Behind the Demand
So, if we look back at our special “Insurance Shop” in the marketplace, we can now see why
some people walk in eagerly, some hesitate at the door, and some don’t even look at it.
• Those with higher income and awareness step in confidently.
• Those bound by law are pushed inside.
• Those with families or living in risky areas run in for safety.
• And those who see trust, choice, and tax benefits happily stay loyal customers.
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In short, the demand for insurance is like a recipe—it needs many ingredients: money,
knowledge, trust, family needs, government rules, and even a pinch of fear. If all these mix
in the right proportion, the demand rises. If some are missing, the demand falls.
8. Write a short note on:
(a) Cost Consciousness and pricing of insurance product.
(b) Accounting Practices and Pricing of insurance product.
Ans: (a) Cost Consciousness and Pricing of Insurance Product
Cost consciousness in insurance is the mindset of being constantly aware of all the costs
involved in designing, selling, and servicing an insurance product — and making sure these
costs are controlled so the product remains affordable for customers and profitable for the
insurer.
Why Cost Consciousness Matters
• Insurance is a promise to pay in the future. If costs are underestimated today, the
company might struggle tomorrow.
• Overpricing can drive customers away; underpricing can cause losses.
• In a competitive market, efficient cost management allows insurers to offer better
rates without compromising quality.
Key Cost Components in Pricing
When the pricing team sets the premium, they consider:
1. Risk Cost (Pure Premium)
o Based on the probability of a claim and the expected claim amount.
o Example: If data shows that out of 1,000 similar policyholders, 10 are likely to
claim ₹1 lakh each, the pure risk cost is ₹10 lakh ÷ 1,000 = ₹1,000 per policy.
2. Operating Expenses
o Agent commissions, salaries, office rent, IT systems, marketing.
o These are added to the risk cost.
3. Contingency Margin
o A safety buffer for unexpected events (e.g., higher-than-expected claims).
4. Profit Margin
o The return expected by shareholders.
5. Regulatory Costs
o Compliance with IRDAI guidelines, solvency requirements.
The Role of Cost Consciousness in Pricing
• Data-Driven Decisions: Using accurate mortality/morbidity tables, claims history,
and market trends.
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• Efficiency: Reducing unnecessary expenses in distribution or administration.
• Product Design: Avoiding overly complex features that increase servicing costs.
• Competitive Benchmarking: Comparing with market rates to stay attractive.
A Simple Analogy: Think of an insurance product like a train ticket. The fare must cover:
• The cost of running the train (claims).
• Staff salaries and station maintenance (operating expenses).
• A reserve for emergencies (contingency).
• A small surplus for future improvements (profit).
If the fare is set too low, the train service will collapse; if it’s too high, passengers will choose
another train.
(b) Accounting Practices and Pricing of Insurance Product
If cost consciousness is about planning the meal, accounting practices are about keeping
the kitchen ledger — tracking every ingredient used, every dish sold, and ensuring the
books balance at the end of the day.
In insurance, accounting practices are crucial because they:
• Provide the financial data needed for accurate pricing.
• Ensure compliance with laws and standards.
• Help monitor whether products are performing as expected.
Key Accounting Practices in Insurance
1. Premium Recognition
o Premium income is recorded over the period of risk coverage, not all at once.
o Example: An annual premium is “earned” month by month as coverage is
provided.
2. Claims Accounting
o Claims paid are recorded immediately.
o Provisions are made for outstanding claims (reported but not yet settled)
and IBNR (Incurred But Not Reported) claims.
3. Expense Allocation
o Operating expenses are allocated to different products to see which ones are
profitable.
4. Reserving
o Setting aside funds (technical reserves) to meet future claims and obligations.
o Includes unearned premium reserve and claims reserves.
5. Investment Income
o Premiums are invested until claims are paid; investment returns are a key
part of pricing assumptions.
6. Regulatory Reporting
o Following IRDAI formats and timelines.
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o Compliance with accounting standards (like Ind AS/IFRS for insurance
contracts).
How Accounting Links to Pricing
• Historical Data: Accounting records provide past claims experience, expense ratios,
and investment returns — the raw material for pricing models.
• Performance Monitoring: If a product’s claims ratio (claims ÷ premiums) is too high,
pricing may need revision.
• Profitability Analysis: Accounting shows whether the premium charged is covering
costs and generating the expected margin.
• Regulatory Compliance: Pricing must align with solvency requirements revealed in
financial statements.
Example in Action: Suppose an insurer launches a health policy priced at ₹10,000 per year.
• After a year, accounting data shows:
o Average claims per policy: ₹7,500
o Expenses: ₹2,000
o Profit: ₹500
• If claims rise to ₹8,500 next year, the pricing team may need to increase the
premium or adjust benefits.
Bringing (a) and (b) Together
Cost consciousness ensures that before a product is launched, every rupee of expected cost
is considered. Accounting practices ensure that after launch, every rupee of actual cost is
tracked.
The cycle works like this:
1. Pricing Stage: Use past accounting data + cost estimates to set premiums.
2. Operational Stage: Sell policies, collect premiums, pay claims.
3. Accounting Stage: Record all transactions, analyse performance.
4. Review Stage: Feed results back to pricing for adjustments.
A Story to Tie It Together
Imagine “SecureLife Insurance Co.” is planning a new term life policy.
• The Cost & Pricing Team studies mortality tables, estimates claims, adds expenses,
and sets a premium of ₹5,000 per year.
• The Accounting Team tracks every policy sold, every claim paid, and every rupee
earned from investments.
• After two years, accounting reports show that claims are slightly higher than
expected and expenses have reduced due to online sales.
• The pricing team uses this updated data to adjust the premium to ₹5,200 — keeping
the product sustainable and competitive.
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Conclusion
In insurance, cost consciousness is about being smart and disciplined when setting prices —
knowing exactly what goes into the premium and controlling unnecessary costs. Accounting
practices are about keeping precise, transparent records that not only satisfy regulators but
also give the pricing team the feedback they need to keep products fair and profitable.
Together, they form a continuous loop of plan → act → measure → improve, ensuring that
the insurer can keep its promises to policyholders while staying financially healthy.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
